Tuesday, December 23, 2008

Turning the Economy Around

As the economy grows worse, everyone, right down to President-elect Obama, seems to have a plan to turn the economy around. So, why not me?

Sure, I don’t have a lot of training in economics, but neither does Obama or most members of Congress. And there are economists supporting and opposing every idea that’s floating around.

So here goes:

My plan is built on some basic assumptions:

1. Investment drives job creation. Large companies or small businesses, all need money to operate, expand and create jobs.

2. People take the risk of investing money because they hope for a Return on Investment (ROI). Why put your money in a CD, instead of your safe deposit box? You want to get paid interest. Why take the risk of buying stocks or starting a business, when your money would be safer under the mattress? You want to make more money. No return—no investment. It’s promises of great returns (and low risk) that suck people into Ponzi schemes, like the Madoff Hedge Fund or Social Security.

3. Investors like the security of knowing what the rules are, of stability, and of a level playing field, reasonably free of corruption. One of the reasons many third world countries are so poor is that individuals and companies won’t invest there. There’s no guarantee your profits won’t be siphoned off by corrupt officials, or your factory “nationalized” or taxed out of existence.

Companies want to invest in new facilities in areas that have stable rules, with the opportunity to make good profits.

4. There’s a lot of scared money hiding out, not currently invested in the economy, because the market and everything else seems too risky. To turn the economy around, we need to get that money invested in job-creating enterprises again. And most experts think stocks are now under-valued.

5. Free trade increases wealth. After NAFTA passed, the number of jobs increased in both Mexico and the US-economics is not a zero-sum game. Unfortunate, the lost jobs were localized in specific industries, which howled, especially if they were unionized. The larger job gain was spread across the economy; people in those new jobs had no clue they were working thanks to NAFTA. Some of them doubtless joined the chorus against NAFTA for “sending US jobs overseas.”

Unfortunately, in a downturn, the political pressure is to put up trade barriers to “protect jobs!” Most economists believe the Smoot-Hawley Tariff Bill made the great depression longer and deeper. But even countries that recently promised at the economic summit to not do this are caving and putting up barriers. That will make things worse world wide.

To turn the economy around, President-elect Obama and the leaders of both parties in Congress should pledge the following:

1. To reduce the Capital Gains Tax to 5%, and to keep it there for at least five years. Job-creating money would flood back into the stock market, as savvy investors scooped up the bargains. With the market rising, more money would flood in, as other investors fearful of missing the market recovery jumped on board. Recapitalized companies could expand in good markets, creating jobs, which would increase economic demand. And those of us with 401Ks/IRAs would develop confidence in the future, thus be willing to spend more money now, driving demand—perhaps even in housing. (Bonus: government revenue from CG taxes goes up when the rate is reduced, due to increased economic activity—look it up.)

2. To tear down all tariff and trade barriers with all countries which are willing to establish free trade with the US. No exceptions. Call it the WWFTA. Investment would flow to where it was most efficiently used. And, BTW, the liberals have always been very concerned about the poor in the third world. Wouldn’t giving them jobs be a lot better than taxing Americans to pay for foreign aid, most of which goes into the pockets of the corrupt oligarchs? When the world’s economy booms, our economy booms.

3. Make America very business-friendly. That means killing card check, so the UAW, having built Ford, Chrysler and GM into the economic powers they are today, can’t go into pro-business states and drive the Toyota and BMW plants out of the country. Make the entire country a right-to-work state. Reduce the paperwork and regulation businesses have to jump through. Maybe George McGovern, who discovered how hard it is to run a small business in a highly-regulated environment—in his case a country inn after he retired from the senate—could head a task force for meaningful regulatory reform.

4. Stop welfare for corporations, from the Detroit bailout to farm subsidies. Let Detroit reorganize under bankruptcy protect to be able to compete—without bailouts, with Honda and Toyota. Let the market set the price for food, and more starving people could afford food around the world—or don’t liberals want to feed the hungry? The government would have more money to spend on infrastructure needed for the economy, like roads and bridges. (Obama’s plan there was good, right up until he picked a Republican member of the Illinois’ Political Combine to run it. Watch this closely for the touch of “The Chicago Way.”)

5. Limit lawsuits against business. Nothing would encourage small businesses like meaningful tort reform. Of course, with the League of Leftwing Lawyers in full charge of Congress this is unlikely to happen.

And the other parts of my economic stimulus plan fly in the face of everything the Democrats ran on. So we are as likely to see an economic recovery based on this as I am likely to see a personal economic recovery based on Governor Blago awarding me Obama’s vacant seat in the US Senate.